Fly me to the boom: the rise of Emirates and Etihadby ASC Staff on Dec 30, 2012
By Anil Bhoyrul
With just ten minutes to go, tensions are running high inside Manchester City’s Etihad Stadium. It’s mid September, and the reigning Premiership champions are a goal up against Arsenal. The posters of the club’s owner, Sheikh Mansour, are beginning to appear, in anticipation of another victory.
“Don’t mess with Abu Dhabi!” chants Dave, a 62-year-old lifelong City fan.
Moments later, Laurent Koscielny stuns the 47,805 crowd with a headed goal for Arsenal, sending their fans into ecstasy. Michael , also 62 and a lifelong Arsenal fan, is delirious. “You’ll never beat the Emirates! You’ll never beat the Emirates!”
As the fans spill out of the stadium after the match, one Arsenal fan, almost surreally, begins chanting at his Manchester City rivals: “At least we’ve got the A380!”
Three and a half thousand miles away, sitting in Dubai and Abu Dhabi, the senior management of Emirates Airline and Etihad Airways can hardly believe their luck. This is not meant to be a good time to be in aviation. The airline industry, which has been in a downward spiral since its peak in 2010, is forecast to earn $4.1bn in profits this year, according to the International Air Transport Association. That's slightly up from the agency’s original estimate of $3bn in profit, yet still 78.6 percent lower than the high of $19.2bn earned by carriers two years ago.
Yet Emirates continues to be one of the fastest growing airlines in the world. In spite of unstable global economic, geopolitical and environmental conditions, it can’t seem to stop making profit. In the first half of the 2012-13 fiscal year, its net profit more than doubled to $464m from $228m in the same period a year ago. It now flies to 126 destinations, up from 114 last year, and 74 countries, compared with 67 last year. The airline has launched five new destinations since 1 April this year alone. Emirates is already the world’s biggest customer for the Airbus A380, and the largest customer for Boeing's wide-body 777.
Etihad Airways has only been in existence for nine years. Back in 2006, it set 2011 as the breakeven year, yet — against all the odds — it somehow managed to turn in a $14m profit last year. It carried a staggering 8.3 million passengers during the year.
From its hub at Abu Dhabi International Airport, Etihad Airways serves 86 passenger and cargo destinations in 56 countries, with a fleet of 67 Airbus and Boeing aircraft, and over 90 aircraft on firm order, including ten Airbus A380s. It also has equity investments in airberlin, Air Seychelles, Virgin Australia and Aer Lingus.
From codeshares to equity deals, new routes and plane orders — and spectacular sponsorship deals such as the Emirates Stadium in London and Etihad Stadium in Manchester, the UAE airline giants have not only bucked the global aviation trend, but appear to be on a path of unstoppable growth.
The only two people not fazed by the numbers are Emirates president Tim Clark and Etihad Airways CEO James Hogan. Both veterans of the industry, they have also fast become the envy of the airline business.
“We run our business differently. We are opportunist. Our strategies seem to be paying off. Our profits are down but everybody’s profits are down — but we’re making money despite the adversity and the trading conditions elsewhere,” says Clark, speaking from his headquarters in Dubai.
“We have a completely different business model which relies on now a varied 126 destination network spanning the globe to feed our business across our hub from all sorts of places that people in the past thought we were nuts to go to. But now, of course, they’re paying dividends,” Clark adds. “We are able to keep our head above water, keep on growing our business, relying on a revenue stream that come from fairly geographic distant and somewhat regarded as remote to the airline world. We do not put all our eggs in the same basket with regards to the north Atlantic or south Atlantic. We try and balance the production so that we can take any knocks in the system that come from anywhere.”
A hundred kilometres down the road in Abu Dhabi, Hogan is equally clear.
“The rule book is changing,” he says. “The difference for us is we are a non-legacy carrier, we have been able to take advantage of geography, of technology and, within three hours flying time, the GCC, Middle East and Indian subcontinent is still the region of the world that has open skies. As the European carriers have retreated back to their hubs it has presented us an opportunity to increase our frequency and connectivity and what we are seeing out of our secondary cities strategy. This is something both Emirates and Etihad have taken advantage of.”
The strategies of Emirates and Etihad are quite different, though the results are the same. Emirates has almost always pushed for organic growth — more routes, more passengers, more planes. The carrier’s revenue, including other operating income, of $9.7bn during the first six months of its financial year, was higher by seventeen percent compared with $8.2bn recorded last year, largely reflecting a strong passenger yield based on constantly high fuel prices.
Seat factors at the Dubai carrier averaged 80 percent, slightly above last year’s 79 percent. Emirates carried 18.7 million passengers since 1 April 2012, up 15.4 percent for the same period last year.
“We are subjected to the same adverse trading conditions as everybody else be that depressed economies in Europe, high fuel prices, difficulties in government punitive taxation, environmental taxes, we face that just the same,” Clark says.
“The primary driver in all of this is the cost of fuel. If that was down where it should be, which is about $80 a barrel, and the fuel into plane was about 250 cents instead of 340 cents as it is for Emirates today, you would be talking looking a different complexion on international aviation,” Clark adds. “It would be far more profitable, it would be far more expansive, and it would be far more upbeat. At the moment it is depressed. The mindset of the management of these companies is fairly negative and concerned more about trying to keep their heads above water than growth.”
Down the road in the UAE capital, the most recent figures from Etihad Airways showed an impressive 30 percent increase in its half-year revenues, which climbed to $2.24bn. The carrier’s passenger numbers leapt to 4.89 million during that period, thanks to increased overall capacity and improved seat factors that averaged 77.6 percent from 73 percent in the same period a year ago.
The record results were boosted by the airline’s growing network of codeshares and strategic partnerships which together fed 800,000 passengers into Etihad Airways’ network in the last six months. During the quarter, Etihad Airways took minority equity stakes in Aer Lingus and in Virgin Australia, adding to its minority shareholdings in airberlin and Air Seychelles. Together these five airlines carried 72 million passengers on 376 aircraft in 2011, generating combined revenues of more than $14bn.
“It’s legacy cost structure versus non-legacy cost structure,” explains Hogan.
“Many European carriers are operating out of two hubs, which may have made sense two years ago, but from a productivity or fleet utilisation point of view, it’s a problem for them,” he says. “British Airways doesn’t fly out of Manchester any more; they have effectively said the north of England doesn’t make sense any more and we have taken advantage of that vacuum.
“What you are seeing in our partnerships is that the world is changing; maybe some of the taboos of the past don’t apply any more. Strong commercial decision making — how you build networks — is what it’s all about. But the codeshare and equity deals enable us to stretch our network, while especially with equity partners we can take out more costs.”
Etihad is still on the lookout for more equity deals, with Hogan suggesting that a couple more could be on the cards, “but they have to make sense”. The carrier’s “formula is one of connectivity over Abu Dhabi and that we can move traffic over Abu Dhabi — we have like-minded management teams. We are not majority shareholders so we are not running their businesses for them”.
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